Google Announces Fourth Quarter And Fiscal Year 2008 Results

Google Announces Fourth Quarter And Fiscal Year 2008 Results

MOUNTAIN VIEW, Calif. – January 22, 2009 - Google Inc. (NASDAQ: GOOG) today announced
financial results for the quarter and for the fiscal year ended December 31, 2008.

“Google performed well in the fourth quarter, despite an increasingly difficult
economic environment. Search query growth was strong, revenues were up in most
verticals, and we successfully contained costs,” said Eric Schmidt, CEO of Google.
“It's unclear how long the global downturn will last, but our focus remains on the long
term, and we'll continue to invest in Google's core search and ads business as well as
in strategic growth areas such as display, mobile, and enterprise.”

Google also announced today that it is planning to offer employees a voluntary,
one-for-one stock option exchange. This program, intended to create more incentives for
employees to remain at Google and contribute to achieving its business objectives, is
currently scheduled to begin on January 29, 2009 and end on March 3, 2009, unless
Google is required or opts to extend the offer period to a later date. Please see the
section "Employee Stock Option Exchange" below for more details.

Q4 Financial Summary

Google reported revenues of $5.70 billion for the quarter ended December 31, 2008, an
increase of 18% compared to the fourth quarter of 2007 and an increase of 3% compared
to the third quarter of 2008. Google reports its revenues, consistent with GAAP, on a
gross basis without deducting traffic acquisition costs (TAC). In the fourth quarter of
2008, TAC totaled $1.48 billion, or 27% of advertising revenues.

Google reports operating income, net income, and earnings per share (EPS) on a GAAP and
non-GAAP basis. The non-GAAP measures, as well as free cash flow, an alternative
non-GAAP measure of liquidity, are described below and are reconciled to the
corresponding GAAP measures in the accompanying financial tables.

GAAP operating income for the fourth quarter of 2008 was $1.86 billion, or 33% of
revenues. This compares to GAAP operating income of $1.65 billion, or 30% of revenues,
in the third quarter of 2008. Non-GAAP operating income in the fourth quarter of 2008
was $2.15 billion, or 38% of revenues. This compares to non-GAAP operating income of
$2.02 billion, or 37% of revenues, in the third quarter of 2008.

GAAP net income for the fourth quarter of 2008 was $382 million as compared to
$1.29 billion in the third quarter of 2008. Non-GAAP net income in the fourth quarter
of 2008 was $1.62 billion, compared to $1.56 billion in the third quarter of 2008.

GAAP EPS for the fourth quarter of 2008 was $1.21 on 317 million diluted shares
outstanding, compared to $4.06 for the third quarter of 2008 on 318 million diluted
shares outstanding. Non-GAAP EPS in the fourth quarter of 2008 was $5.10, compared to
$4.92 in the third quarter of 2008.

Non-GAAP operating income and non-GAAP operating margin exclude the expenses
related to stock-based compensation (SBC) and the settlement agreement with the Authors
Guild and the Association of American Publishers (AAP). Non-GAAP effective tax rate,
non-GAAP net income, and non-GAAP EPS exclude the expenses and tax benefits related to
SBC, the settlement agreement with the Authors Guild and the AAP and the non-cash
impairment charges primarily related to our investments in AOL and Clearwire. In the
fourth quarter of 2008, the charge related to SBC was $286 million as compared to $280
million in the third quarter of 2008. Also, in the fourth quarter of 2008, we
recognized $1.09 billion in asset impairment charges related primarily to our
investments in AOL and Clearwire. In the third quarter of 2008, we recognized $95
million of expense related to the settlement agreement with the Authors Guild and the
AAP. The tax benefit related to SBC was $65 million in the fourth quarter of 2008 and
$63 million in the third quarter of 2008. The tax benefit related to the impairment
charges was $82 million in the fourth quarter of 2008. The tax benefit related to the
settlement agreement was $39 million in the third quarter of 2008. Reconciliations of
non-GAAP measures to GAAP operating income, operating margin, effective tax rate, net
income, and EPS are included at the end of this release.

Q4 Financial Highlights

Revenues – Google reported revenues of $5.70 billion in the fourth
quarter of 2008, representing an 18% increase over fourth quarter 2007 revenues of
$4.83 billion and a 3% increase over third quarter 2008 revenues of $5.54 billion.
Google reports its revenues, consistent with GAAP, on a gross basis without deducting
TAC.

Google Sites Revenues - Google-owned sites generated revenues of $3.81
billion, or 67% of total revenues, in the fourth quarter of 2008. This represents a 22%
increase over fourth quarter 2007 revenues of $3.12 billion and a 4% increase over
third quarter 2008 revenues of $3.67 billion.

Google Network Revenues - Google’s partner sites generated revenues,
through AdSense programs, of $1.69 billion, or 30% of total revenues, in the fourth
quarter of 2008. This represents a 4% increase over fourth quarter 2007 network
revenues of $1.64 billion and a 1% increase over third quarter 2008 network revenues of
$1.68 billion.

International Revenues - Revenues from outside of the United States
totaled $2.86 billion, representing 50% of total revenues in the fourth quarter of
2008, compared to 48% in the fourth quarter of 2007 and 51% in the third quarter of
2008. Had foreign exchange rates remained constant from the third quarter of 2008
through the fourth quarter of 2008, our revenues in the fourth quarter of 2008 would
have been $334 million higher. Had foreign exchange rates remained constant from the
fourth quarter of 2007 through the fourth quarter of 2008, our revenues in the fourth
quarter of 2008 would have been $266 million higher.

Revenues from the United Kingdom totaled $685 million, representing 12% of revenue in
the fourth quarter of 2008, compared to 14% in the fourth quarter of 2007 and 14% in
the third quarter of 2008.

In the fourth quarter, we recognized a benefit of $129 million to revenue through our
foreign exchange risk management program.

Paid Clicks – Aggregate paid clicks, which include clicks related to
ads served on Google sites and the sites of our AdSense partners, increased
approximately 18% over the fourth quarter of 2007 and increased approximately 10% over
the third quarter of 2008.

TAC - Traffic Acquisition Costs, the portion of revenues shared with
Google’s partners, decreased to $1.48 billion in the fourth quarter of 2008. This
compares to TAC of $1.50 billion in the third quarter of 2008. TAC as a percentage of
advertising revenues was 27% in the fourth quarter, compared to 28% in the third
quarter of 2008.

The majority of TAC expense is related to amounts ultimately paid to our AdSense
partners, which totaled $1.29 billion in the fourth quarter of 2008. TAC is also
related to amounts ultimately paid to certain distribution partners and others who
direct traffic to our website, which totaled $190 million in the fourth quarter of
2008.

Other Cost of Revenues - Other cost of revenues, which is comprised
primarily of data center operational expenses, amortization of intangible assets,
content acquisition costs as well as credit card processing charges, increased to $707
million, or 12% of revenues, in the fourth quarter of 2008, compared to $678 million,
or 12% of revenues, in the third quarter of 2008.

Operating Expenses - Operating expenses, other than cost of revenues,
were $1.65 billion in the fourth quarter of 2008, or 29% of revenues, compared to $1.72
billion in the third quarter of 2008, or 31% of revenues. The operating expenses in the
fourth quarter of 2008 included $890 million in payroll-related and facilities
expenses, compared to $859 million in the third quarter of 2008.

Stock-Based Compensation (SBC) – In the fourth quarter of 2008, the
total charge related to SBC was $286 million as compared to $280 million in the third
quarter of 2008.

Employee Stock Option Exchange - Our Board of Directors has approved
an exchange offer to allow employees the opportunity to exchange all or a portion of
their existing stock options for the same number of new options. This program is
currently scheduled to commence on January 29, 2009 and end on March 3, 2009 at 6:00
a.m. Pacific Time, unless Google is required or opts to extend the offer period to a
later date. Currently, we expect that new options will have an exercise price equal to
the closing price per share of our common stock on March 2, 2009 and that stock options
with exercise prices above this closing price will be eligible for exchange, but this
may change. Generally, all employees with options are eligible to participate in the
program (Eric Schmidt, Sergey Brin, and Larry Page do not hold options).

The number of Google shares subject to outstanding options will not change as a result
of the exchange offer. We have designed the program so that new options issued as part
of this exchange offer will be subject to a new vesting schedule which adds 12 months
to the original applicable vesting dates. In addition, new options will vest no sooner
than 6 months after the close of the offer period. The expiration dates of the new
options will remain the same as the expiration dates of the options being exchanged.

We expect to take a modification charge estimated to be $460 million over the vesting
periods of the new options. These vesting periods range from six months to
approximately five years. Assuming the offer proceeds according to our planned
timeline, this modification charge will be recorded as additional stock based
compensation beginning in the first quarter of 2009. This estimate assumes an exchange
price of approximately $300 and that all eligible underwater options will be exchanged
under the program. As a result, the actual amount of the modification charge is likely
to change.

We currently estimate stock-based compensation charges for grants to employees prior to
January 1, 2009 to be approximately $1.04 billion for 2009. This estimate does not
include expenses to be recognized related to employee stock awards that are granted
after January 1, 2009 or non-employee stock awards that have been or may be granted. It
also does not include the estimated $460 million modification charge related to our
employee stock option exchange.

Operating Income - GAAP operating income in the fourth quarter of 2008
was $1.86 billion, or 33% of revenues. This compares to GAAP operating income of $1.65
billion, or 30% of revenues, in the third quarter of 2008. Non-GAAP operating income in
the fourth quarter of 2008 was $2.15 billion, or 38% of revenues. This compares to
non-GAAP operating income of $2.02 billion, or 37% of revenues, in the third quarter of
2008.

Impairment on Equity Investments - We have determined that certain of
our assets are impaired and require us to recognize non-cash impairment charges related
to those investments. In the fourth quarter of 2008, the impairment charge on these
assets was $1.09 billion, including charges of $726 million and $355 million related to
our investments in AOL and Clearwire, respectively.

Interest Income and Other, Net – Interest income and other, net
increased to $70 million in the fourth quarter of 2008, compared with interest income
and other, net of $21 million in the third quarter of 2008.

Income Taxes – Our GAAP effective tax rate was 54% for the fourth
quarter of 2008 and 28% for the year, which includes the effect of the impairment on
our equity investments of $1.09 billion in the fourth quarter and the legal settlement
of $95 million with the Authors Guild and the AAP in the third quarter. Our non-GAAP
effective tax rate, defined as our income before income taxes adding back impairment
charges, legal settlement, and stock-based compensation divided into the result
obtained by subtracting the related tax benefits from our provision for income taxes,
for the fourth quarter and for the year was 27% and 24%, respectively.

Net Income – GAAP net income for the fourth quarter of 2008 was $382
million as compared to $1.29 billion in the third quarter of 2008. Non-GAAP net income
was $1.62 billion in the fourth quarter of 2008, compared to $1.56 billion in the third
quarter of 2008. GAAP EPS for the fourth quarter of 2008 was $1.21 on 317 million
diluted shares outstanding, compared to $4.06 for the third quarter of 2008, on 318
million diluted shares outstanding. Non-GAAP EPS for the fourth quarter of 2008 was
$5.10, compared to $4.92 in the third quarter of 2008.

Cash Flow and Capital Expenditures – Net cash provided by operating
activities for the fourth quarter of 2008 totaled $2.12 billion as compared to $2.18
billion for the third quarter of 2008. In the fourth quarter of 2008, capital
expenditures were $368 million, the majority of which was related to IT infrastructure
investments, including data centers, servers, and networking equipment. Free cash flow,
an alternative non-GAAP measure of liquidity, is defined as net cash provided by
operating activities less capital expenditures. In the fourth quarter of 2008, free
cash flow was $1.75 billion.

We expect to continue to make significant capital expenditures.

A reconciliation of free cash flow to net cash provided by operating activities, the
GAAP measure of liquidity, is included at the end of this release.

On a worldwide basis, Google employed 20,222 full-time employees as of December 31,
2008, up from 20,123 full-time employees as of September 30, 2008.

WEBCAST AND CONFERENCE CALL INFORMATION

A live audio webcast of Google’s fourth quarter 2008 earnings release call will be
available at http://investor.google.com/webcast.html. The
call begins today at 1:30 PM (PT) / 4:30 PM (ET). This press release, the financial
tables, as well as other supplemental information including the reconciliations of
certain non-GAAP measures to their nearest comparable GAAP measures, are also available
on that site. A replay of the call will be available beginning at 7:30 PM (ET) today
through midnight Thursday, January 29, 2009 by calling 888-203-1112 in the United
States or 719-457-0820 for calls from outside the United States. The required
confirmation code for the replay is 1287114.

Following the earnings conference call, Google will host an additional
question-and-answer session to provide an opportunity for financial analysts to ask
more detailed product and financial questions. This follow-up call will begin today at
3:00 PM (PT) / 6:00 PM (ET) and also be webcast and available at
http://investor.google.com/webcast.html. A replay of the second call will be
available beginning at 9:00 PM (ET) today through midnight Thursday, January 29, 2009
by calling 888-203-1112 in the United States or 719-457-0820 for calls from outside the
United States. The required confirmation code for the replay is 1040653.

FORWARD LOOKING STATEMENTS

This press release contains forward-looking statements that involve risks and
uncertainties. These statements include statements regarding our proposed option
exchange program, our expected stock-based compensation charges (including the expected
modification charge resulting from the option exchange program), and our plans to make
significant capital expenditures. Actual results may differ materially from the results
predicted and reported results should not be considered as an indication of future
performance. The potential risks and uncertainties that could cause actual results to
differ from the results predicted include, among others, unforeseen changes in our
hiring patterns and our need to expend capital to accommodate the growth of the
business, as well as those risks and uncertainties included under the captions “Risk
Factors” and “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” in our Quarterly Report on Form 10-Q for the quarter ended September
30, 2008, which is on file with the SEC and is available on our investor relations
website at investor.google.com and on the SEC website at www.sec.gov. Additional
information will also be set forth in our report on Form 10-K for the year ended
December 31, 2008, which we expect to file with the SEC in February 2009. All
information provided in this release and in the attachments is as of January 22, 2009
and Google undertakes no duty to update this information.

ABOUT THE OPTION EXCHANGE PROGRAM

The option exchange program described in this press release has not commenced. At the
time the option exchange begins, if at all, Google will provide eligible employees with
written materials explaining the precise terms and timing of the option exchange.
Holders of options to buy Google's Class A Common Stock that are eligible to
participate in this option exchange should read these materials carefully when they
become available because they will contain important information about the option
exchange. Upon commencement of the program, Google will also file these written
materials with the SEC as part of a tender offer statement. Google's stockholders and
optionholders will be able to obtain these written materials and other documents filed
by Google with the SEC free of charge from the SEC's website at www.sec.gov.

ABOUT NON-GAAP FINANCIAL MEASURES

To supplement our consolidated financial statements, which statements are prepared and
presented in accordance with GAAP, we use the following non-GAAP financial measures:
non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, non-GAAP
effective tax rate, non-GAAP EPS and free cash flow. The presentation of this financial
information is not intended to be considered in isolation or as a substitute for, or
superior to, the financial information prepared and presented in accordance with GAAP.
For more information on these non-GAAP financial measures, please see the tables
captioned "Reconciliations of non-GAAP results of operations measures to the nearest
comparable GAAP measures", "Reconciliations of GAAP to non-GAAP effective tax rate,"
and "Reconciliation from net cash provided by operating activities to free cash flow"
included at the end of this release.

We use these non-GAAP financial measures for financial and operational decision making
and as a means to evaluate period-to-period comparisons. Our management believes that
these non-GAAP financial measures provide meaningful supplemental information regarding
our performance and liquidity by excluding certain expenses and expenditures that may
not be indicative of our "recurring core business operating results," meaning our
operating performance excluding not only non-cash charges, such as stock-based
compensation, but also discrete cash charges that are infrequent in nature. We believe
that both management and investors benefit from referring to these non-GAAP financial
measures in assessing our performance and when planning, forecasting and analyzing
future periods. These non-GAAP financial measures also facilitate management's internal
comparisons to our historical performance and liquidity as well as comparisons to our
competitors' operating results. We believe these non-GAAP financial measures are useful
to investors both because (1) they allow for greater transparency with respect to key
metrics used by management in its financial and operational decision making and (2)
they are used by our institutional investors and the analyst community to help them
analyze the health of our business.

Non-GAAP operating income and operating margin. We define non-GAAP operating
income as operating income plus stock-based compensation and, for the third quarter of
2008, the expense related to the settlement agreement with the Authors Guild and the
AAP. Non-GAAP operating margin is defined as non-GAAP operating income divided by
revenues. Google considers these non-GAAP financial measures to be useful metrics for
management and investors because they exclude the effect of stock-based compensation
and one-time events so that Google's management and investors can compare Google's
recurring core business operating results over multiple periods. Because of varying
available valuation methodologies, subjective assumptions and the variety of award
types that companies can use under FAS 123R, Google's management believes that
providing a non-GAAP financial measure that excludes stock-based compensation allows
investors to make meaningful comparisons between Google's recurring core business
operating results and those of other companies, as well as providing Google's
management with an important tool for financial and operational decision making and for
evaluating Google's own recurring core business operating results over different
periods of time. There are a number of limitations related to the use of non-GAAP
operating income versus operating income calculated in accordance with GAAP. First,
non-GAAP operating income excludes some costs, namely, stock-based compensation, that
are recurring. Stock-based compensation has been and will continue to be for the
foreseeable future a significant recurring expense in Google's business. Second,
stock-based compensation is an important part of our employees' compensation and
impacts their performance. Third, the components of the costs that we exclude in our
calculation of non-GAAP operating income may differ from the components that our peer
companies exclude when they report their results of operations. Management compensates
for these limitations by providing specific information regarding the GAAP amounts
excluded from non-GAAP operating income and evaluating non-GAAP operating income
together with operating income calculated in accordance with GAAP.

Non-GAAP net income and EPS. We define non-GAAP net income as net income plus
stock-based compensation, and, for the third quarter of 2008, the expense related to
the settlement agreement, and, for the fourth quarter of 2008, non-cash impairment
charges less the related tax effects of such items. We define non-GAAP EPS as non-GAAP
net income divided by the weighted average shares, on a fully-diluted basis,
outstanding as of December 31, 2008. We consider these non-GAAP financial measures to
be a useful metric for management and investors for the same reasons that Google uses
non-GAAP operating income and non-GAAP operating margin. However, in order to provide a
complete picture of our recurring core business operating results, we exclude from
non-GAAP net income and non-GAAP EPS the tax effects associated with stock-based
compensation, the expense related to the settlement agreement in the third quarter of
2008 and the impairment charges in the fourth quarter of 2008. Without excluding these
tax effects, investors would only see the gross effect that excluding these expenses
had on our operating results. The same limitations described above regarding Google's
use of non-GAAP operating income and non-GAAP operating margin apply to our use of
non-GAAP net income and non-GAAP EPS. Management compensates for these limitations by
providing specific information regarding the GAAP amounts excluded from non-GAAP net
income and non-GAAP EPS and evaluating non-GAAP net income and non-GAAP EPS together
with net income and EPS calculated in accordance with GAAP.

Non-GAAP effective tax rates. We define the non-GAAP effective tax rates as
income before income taxes adding back the expense related to the settlement agreement
in the third quarter of 2008, the impairment charges in the fourth quarter of 2008 and
stock-based compensation divided into the result obtained by subtracting the related
tax benefits from our provision for income taxes. We consider this non-GAAP financial
measure to be a useful metric for management and investors because it excludes the
effect of certain discrete items so that Google's management and investors can compare
Google's recurring earnings results over multiple periods. The same limitations
described above regarding Google's use of non-GAAP operating income and non-GAAP
operating margin apply to our use of the non-GAAP effective tax rates. Management
compensates for these limitations by providing specific information regarding the GAAP
amounts excluded from the non-GAAP effective tax rates and evaluating the non-GAAP
effective tax rates together with the effective tax rates computed on a GAAP basis.

Free cash flow. We define free cash flow as net cash provided by operating
activities minus capital expenditures. We consider free cash flow to be a liquidity
measure that provides useful information to management and investors about the amount
of cash generated by the business that, after the acquisition of property and
equipment, including information technology infrastructure and land and buildings, can
be used for strategic opportunities, including investing in our business, making
strategic acquisitions and strengthening the balance sheet. Analysis of free cash flow
also facilitates management's comparisons of our operating results to competitors'
operating results. A limitation of using free cash flow versus the GAAP measure of net
cash provided by operating activities as a means for evaluating Google is that free
cash flow does not represent the total increase or decrease in the cash balance from
operations for the period because it excludes cash used for capital expenditures during
the period. Our management compensates for this limitation by providing information
about our capital expenditures on the face of the cash flow statement and under
Management's Discussion and Analysis of Financial Condition and Results of Operations
in our Form 10-Q and Annual Report on Form 10-K. Google has computed free cash flow
using the same consistent method from quarter to quarter and year to year.

The accompanying tables have more details on the GAAP financial measures that are most
directly comparable to non-GAAP financial measures and the related reconciliations
between these financial measures.

(a) Operating margin is defined as income from operations divided by revenues.
(b) Non-GAAP operating margin is defined as non-GAAP income from operations divided by
revenues.
(c) To eliminate $280.0 million of stock-based compensation charges recorded in the
third quarter of 2008.
(d) To eliminate $286.2 million of stock-based compensation charges recorded in the
fourth quarter of 2008.
(e) To eliminate income tax effects related to charges noted in (c) and (d).
(f) To eliminate $95.1 million of expense related to the settlement agreement with the
Authors Guild and the Association of American Publishers.
(g) To eliminate $1,094.8 million of impairment charges related to certain equity
investments.
(h) To eliminate income tax effects related to the charges noted in (f) and (g).

(a) To eliminate $280.0 million of stock-based compensation charges recorded in the
third quarter of 2008.
(b) To eliminate $286.2 million of stock-based compensation charges recorded in the
fourth quarter of 2008.
(c) To eliminate $1,119.8 million of stock-based compensation charges recorded for the
year of 2008.
(d) To eliminate income tax effects related to stock-based compensation noted in (a),
(b) and (c).
(e) To eliminate $95.1 million of expense related to the settlement agreement with the
Authors Guild and the Association of American Publishers.
(f) To eliminate $1,094.8 million of impairment charges related to certain equity
investments.
(g) To eliminate income tax effects related to the charges noted in (e) and (f).